India Gold market cautiously optimistic with approach of festive and wedding seasons

The Indian gold market is cautiously optimistic as we approach the festive gold-buying season.

Higher prices continue to weigh on gold jewelry demand even as they support investment purchases. Meanwhile, wedding buying appears “resilient,” according to the World Gold Council.

India ranks as the world’s second-largest gold market.

Gold prices surged in August before pulling back in the early weeks of September.

Gold prices recorded one of their strongest monthly gains in nearly three decades in August. The London Gold Price PM rose 13 percent, ending August at $4,386 per ounce. That was slightly lower than the 14 percent gain recorded in January. 

However, the Fed’s September rate hike and another spike in oil prices created headwinds for gold in the first two weeks of September, causing a sharp price drop.

Gold was up 12 percent in rupee terms last month, closing August at ₹158,854 per 10 grams. The price fell 4.6 percent through the first two weeks of September.

According to the World Gold Council, gold continues to trade at around 2 percent below import parity. This indicates local supply is adequate compared to demand.

Discounts widened from an average of $34 per ounce in July to $51 in August. The discount widened further to $78 per ounce as of Sept. 11.

World Gold Council analysts said, “Market feedback suggests that the exchange of old gold for new jewelry has boosted local supply and helped keep domestic prices below the landed cost. The availability of unofficial supply is also cited as a contributing factor behind the widening discount.”

Demand for gold typically surges in India during the fall. The festive season begins in September, building into Navratri (Oct. 11), and peaking around Dhanteras (Nov. 6) and Diwali (Nov. 8). Buying typically continues into the winter wedding season.

There was strong demand in late August as the run-up to the festive season began but cooled in early September. According to the World Gold Council, volatility, with a sharp price rise in August followed by the September sell-off, left many Indian consumers in a “wait-and-see mode.”

“Retailers have also been cautious about inventory building, preferring to replenish based on realized demand, while some manufacturers have reported delays in uptake of orders by retailers. Wedding-related demand, however, has remained relatively resilient.”

World Gold Council analysts said large retailers have reported “comparatively stronger demand” and have stepped up new product launches, marketing initiatives, and promotional campaigns.

“Despite the recent moderation, the trade remains cautiously optimistic about demand during the peak festive and wedding season."

Meanwhile, investment demand remains “steady,” although there appears to be a modest shift from physical to digital gold.

Inflows into Indian gold ETFs rose 67 percent month-on-month to ₹25.97 billion ($272 million) last month. Indian ETF gold holdings rose by 1.6 tonnes to 121.3 tonnes in August. 

Gold inflows into Indian funds slowed from the exceptionally strong pace of Q1 but have remained positive on “a near-sustained basis” throughout the year. World Gold Council analysts said this underscores investor appetite for gold as a portfolio allocation.

About 4,000 new gold ETF accounts were added in August, increasing ETF folios to 12.54 million. The pace of account growth has slowed significantly from an average monthly increase of 330,000 from January to July. According to the WGC, this suggests that while existing investors continue to accumulate gold through ETFs, new investor entry has slowed. 

ETFs are a convenient way for investors to play the gold market, but owning ETF shares is not the same as holding physical gold.

Digital gold purchases held steady from June to August, averaging around ₹25 billion ($262 million) per month. Demand was significantly higher year-on-year, with August digital gold purchases rising by 110 percent.

Consumers can purchase digital gold online or through an app. The provider holds the physical gold in a vault. In many cases, investors can take possession of physical gold under the company's terms. 

Indian gold imports fell by 45 percent in August. Volumes were estimated between 15 and 20 tonnes. According to the World Gold Council, “This fall in imports suggests that existing domestic supply remained sufficient to meet expected demand.”

Looking ahead, World Gold Council analysts said they expect demand to improve as we move into the festive and wedding season, “supported by steady investment demand and resilient wedding-related buying, though elevated prices and volatility may continue to constrain discretionary buying.”

Indians love gold for both cultural and economic reasons.

The yellow metal is deeply interwoven into India’s marriage ceremonies, as well as religious and cultural rituals. Festival seasons typically boost gold demand.

Indians also value the yellow metal as a store of wealth, especially in poorer rural regions. Around two-thirds of India’s gold demand comes from outside urban centers, where many people operate outside the tax system. Many Indians use gold jewelry not only as an adornment but to preserve wealth.

In the West, gold is generally viewed as a luxury item.

Not in India. Even poor Indians buy gold.

According to a 2018 ICE360 survey, half of India's households had purchased gold within the last five years. Overall, 87 percent of Indian households own some gold. Even households at the lowest income levels in India hold some of the yellow metal. According to the survey, more than 75 percent of families in the bottom 10 percent of income managed to buy some gold.

The yellow metal serves as a lifeline for Indians buffeted by the economic storm caused by the government's response to COVID-19. After the Indian government locked down the country, banks tightened credit to mitigate the default risk. Unable to secure traditional loans, Indians used gold to secure financing. As Indians endured a second wave of lockdowns, many Indians resorted to selling gold outright to make ends meet.